We share the troubling story of a board certified orthopedic surgeon who formed an ambulatory surgery center (ASC) and quickly learned that the devil really is in the details. Tune in as we zoom in on physician investors, rules of the ASC world, and how to protect yourself when investing in an ASC.
Listen to the full episode using the player below, or by visiting one of the links below. Below is the episode’s transcript which has been edited for readability. If you have any questions or would like to learn more, email us at firstname.lastname@example.org.
Intro: [00:00:00] Welcome to Legal 123s with ByrdAdatto. Legal issues, simplified through real client stories and real world experiences. Creating simplicity in three, two, one.
Brad: Welcome back to another episode of Legal 123s with ByrdAdatto. I’m your host, Brad Adatto with my cohost Michael Byrd.
Michael: As a business in healthcare law firm, it’s important to focus on the details. This season’s theme is zoom in. Once we know our big picture vision or strategy, we have to roll up our sleeves to get the work done. With each episode this season we’ll have our typical stories and make sure we talk about specific actions to focus on for 2022.
Brad: Yeah. And you know, the details sometimes can be very cumbersome in Michael because it takes some of the fun out of the big picture, the vision that you’re having. And in today’s episode, the devil was in the details and had the party sent some more time examining these details, they may have not have [00:01:00] done the deal altogether or which with each other, at least. And then Michael, in this episode, unfortunately, we’re going to use a ton of legal jargon
Michael: AKA power drain. Yes. So I love the big picture. Do not love legalese.
Brad: Yeah, I can see that. When we first met in 2005, when we were interviewing, or maybe it was one of our first conversations, I guess when you were seriously considering adding me to the team, you had asked me if I used plain language when working on my legal documents and at first I thought you didn’t think I spoke English because I’m from New Orleans and in Louisiana, most people think we still practice under the Napoleonic Code, which is untrue.
Michael: Well first Brad, who doesn’t ask about plain language on our first date? I mean, come on, but I want to go back to your last statement, which part is untrue because we all know you don’t speak [00:02:00] English. You speak Brad.
Brad: Fair enough. Louisiana is not governed on the Napoleonic Code. So that’s untrue. And I guess it’s true that I don’t speak English, but at the time I was not familiar with the concept of plain language.
Michael: Well, let me give some context here then.
Brad: Yes. We all know that you love context. No one who listens to this episode is even surprised by that statement.
Michael: Okay, well, so this takes me back all the way to law school. And we had to do legal writing, which is not normally an impactful experience, but we had a professor that was big on the whole plain language movement. The idea is, hey, you know, just because you’re a lawyer, doesn’t mean you have to use fancy words. Why don’t you just talk like a regular human being? That was the gist of it. And it seemed to make a lot of sense to me because at that point in time, I was still just a regular human being and I wasn’t a lawyer yet. [00:03:00] So I tried to adopt that. As you know, in my early years I was a litigation attorney and you’re making arguments to the judge and I thought, hey, this is a great time to just be super clear and super concise as to what my points are. And you know, it’s not like it was some contract where you had this feeling like you had to beat used fancy words to make an enforceable. We were just arguing before the court. So I got a pretty well-developed habit of doing that. And as you know, I started doing transactional work and along the way, I was trying to adopt it there, but then I actually had in one of my court cases, what we call a rule 11 agreement, which is a contract with the other attorney. And the other attorney was constantly missing deadlines to turn over documents. And finally, I had enough and I was like, okay, fine. Here’s the deal. I’ll give you one more [00:04:00] extension. This is probably the fifth extension. And if you don’t meet this deadline, you agree by contract to dismiss the case with prejudice, which I was like, okay, well, if he misses it again, this case is over with. And guess what Brad? He missed the deadline again. So I tried to enforce this contract written in super plain language. I won at the trial court, he appealed it to the court of appeals and I won at the court of appeals. And there was some controversy about whether an attorney could agree by contract, to dismiss a case with prejudice. And so that gave me kind of the wind behind the sails of yeah, I’m all in on plain language. And unfortunately, or fortunately for you, our first day was not long after that.
Brad: Well I guess in that contract, if you had like all these cool, awesome [00:05:00] words like Aforesaid, henceforth, hereby, hereof…
Michael: No, I did not use those words, Brad or run-on sentences, which had exceptions to the exceptions, to the exceptions. By using plain language, we could and did eliminate the use of outdated legal jargon and legalese and favor of drafting documents and clear, concise, and modern English. Or as I said earlier, like a real human. Our clients loved it because they would routinely call and say, hey, this is the first contract I’ve ever read where I actually understood what was happening. And so it allows clients regardless of their sophistication with working with lawyers to really understand what’s going on without the frustration, confusion, and need for lengthy explanations of what in the world the documents say in the [00:06:00] first place, by the attorney. And most importantly, they could concentrate on the core terms and conditions and were not trying to read a foreign language.
Brad: Yeah. And, you know, we’ve all heard that term, ignorance to the laws is no excuse. Well, this holds true. And if you have a documentation that the draft is using of these obscure language that an ordinary human can’t understand, and that means the parties just simply don’t understand what they’re getting into when they enter that agreement so who’s the blame, probably the drafting attorney. That’s his job to make sure that everyone understands what’s going on.
Michael: And to be clear, plain language should not carry any connotation of the agreement is being dumbed down. We’re not reverting to kind of cat in the hat and Dick and Jane style of writing.
Brad: This is good stuff too.
Michael: Yeah, for sure. We’re not trying to paint her to the lowest common denominator. In fact, it’s quite the opposite. It takes a lot of work to say what you mean in [00:07:00] clear and concise language. So Brad, even though today could be using a lot of legal mumbo jumbo, let’s work hard on using some plain language.
Brad: I will work very hard of trying not to use illegal mumbo-jumbo. And for those who are listening to this, if we do throw some legal jargon at you just remember like every episode that we have, in this episode, there’ll be a transcript at the bottom of the notes section. So if we say something just doesn’t make sense, feel free to pause and read or go back and read any definitions that we might use today. But Michael, if you’re ready, let’s get going.
Michael: Brad, our client in this story today is a board certified orthopedic surgeon who had a strong focus on spine surgery. We’ll call him Dr. Spine.
Brad: Perfect. Spine doctor equals Dr. Spine. I think we all got that one.
Michael: Yeah. Not feeling too creative [00:08:00] today, but we all get the point. So our client was looking to develop an outpatient surgery center, commonly called an ambulatory surgery center or an ASC.
Brad: Ah, so we’re starting to get to some of that legal jargon. So those not familiar with the term, this is a medical facility that is used to do a lot of times, people call it day surgeries. You’re admitted basically within a timeframe of the day. You’re discharged basically the same day, technically 23 hours. But meaning that you can’t have an overnight stay of that person, like a traditional hospital, which probably most of you guys are familiar with. So typically you have several surgeons or invasive providers who need to have an ambulatory surgery center, and to do well, they need a lot of them to survive, meaning the ASC won’t survive and won’t be profitable. And those who probably have listened to other episodes, you might have heard us talk about the corporate practice of medicine in those episodes, just remember the difference here is an [00:09:00] ASC is a licensed Facility by the state and as such anyone, even two lawyers could own it. So it means that physicians and non-physicians can own an ASC together as a little sidebar to make sure everybody understands because it’s going to be important as we go.
Michael: Yeah. Good point. And here Dr. Spine had a number of surgeries that he could do in an ASC. And just again, quick pause for context. You know, there are some cases that you have to do in the hospital because of just the nature of recovery that goes with it. And so obviously you want to make sure you have a fit there with what the types of cases you do, but he was a solo spine surgeon and he didn’t have enough on his own to single-handedly operate his own ASC so he can invest in one or he could build one and get other doctors in and he determined to build his own. And he actually reached out to a third party to help coordinate the [00:10:00] process, including the building, the funding and the managing of the ASC. He hired a group whose main contact we will call Mr. Network.
Brad: Ooh, I like Mr. Network. Hopefully he knows lots of good physicians. And for context, as Michael explained that a lot of times when these physicians partner up with these third parties, there’s basically three different ways in which we see that the structure of this. So sometimes the physician owns the majority of it, but has that third-party help kind of run it day to day and they go out and find those other new potential physician investors. And when they do, they dilute the physician or other times the ASC third party wants to own the majority of it so the physicians are the minority of it. And if they go out and find more people after managing it, the third party gets diluted. And then we have the less common structure where the doctors have a more minority interest in the ASC. The third party again, runs it and then goes out and finds other physicians to [00:11:00] invest in it. But then even though the doctors, they are the minority portion, they would get diluted. So to be clear, there are other options if you are doing a deal with the hospital, but it’s not really related to this episode. So that’s three different types of models that we typically see.
Michael: Well, of course this story was enough to make it into a podcast episode. So guess what? It was one of the less common models. This is one where the doctor had a minority share and the third-party had the majority. And when the units were sold, it would dilute the physicians.
Brad: Yeah. And so this third model, if it is used, everyone needs to be on the same page as to what is their jobs. So Dr. Spine, he was so crazy busy he just didn’t have the time to really get into this. This is why he partnered with this group and basically let them have these large shares because he couldn’t be distracted by the day to day of running it or finding these doctors or actually making sure that the facility is up and running [00:12:00] correctly. Which is the whole reason why he partnered with Mr. Network.
Michael: So let’s fast forward a little bit. The ASC is getting ready for funding, but so far at this point, Mr. Network has only found one other physician investor, and he was a double board certified in physical medicine and rehabilitation, but not a surgeon. We will call him Dr. Pain.
Brad: Good name, as he became a big pain for our client. Michael, I want to pause a moment. I think when we started this, we said that Dr. Spine had hired Mr. Network to find other surgeons or invasive providers to make this ASC profitable. They only had two doctors and there are different specialties. How does that work with different specialties?
Michael: Well, it can work well most of the time. The parties have to understand that when [00:13:00] developing the ASC, the type of outpatient services provided will drive the equipment decisions, the spacing and the staffing needed. And so failure to understand this detail, zoom in Brad, can be huge. Additionally, how you bill and collect for these procedures can be impactful. And so as an example, are you going to be in network? Are you going to be out of network?
Brad: Michael generally we should stop and give a really long explanation about the differences between in network and out of network, and the pros and cons of that. I think we’re going to do a whole episode this season on that, but for those not familiar with that term that Michael just used as a very quick explanation, often your physician or this facility would have entered in some type of insurance arrangement known as in-network with that health insurance provider and that insurance would then reimburse them based on some [00:14:00] predetermined contractual amount. If they’re not, if they don’t have agreement with that particular group, but the patient does, and they want to bill them for that same service that would be considered out of network. So that’s kind of a baseline understanding of in network and out of network. Again, we’ll do a whole episode on it this season. But in this case is third party so their jobs should help administer and leverage their other relationships with Mr. Network here with other commercial payers to get the best in network contract for the ASC.
Michael: Okay. So back to where we were, Mr. Network convinced Dr. Spine at this point with only one other doctor, hey, if you build it, they will come. That once that once the ground broke, it would be at least six months before the open and they would have plenty of time to find more physicians. Fast forward to 10 months later, and they are getting ready for their soft opening of the ASC.
Brad: That’s more than 6.
Michael: It is Brad. Good math. Even for Louisiana, boy, I’m pretty impressed. And they’re getting ready [00:15:00] for their soft opening at this 10 month mark of the ASC.
Brad: I remember this moment really well, actually you were out of town. So Jay our partner, and I went to go see this new facility. Dr. Spine was pretty excited about finally getting it’s a soft opening, so it wasn’t officially completely done, but enough so that we could kind of walk through it and we were part of it. You know, we helped obviously review a lot of the documents when it came to the deals for the real estate or the commercial loans, and some of the other governing documents that were ones that he had to sign. And so to us, it felt like we were part of it, even though in reality, once everything was signed, the next 10 months we were not part of that process, but it was great just to kind of be there.
Michael: I remember you calling me from the car after you left the facility and you and I were both in shock.
Brad: Yeah so first, Mr. Network, as Michael had already said he still hadn’t even found [00:16:00] another physician provider or investor to get in here. So that kind of was one problem. And that was the first time we learned about it, when I was there. Second, the rooms were really jacked up. And what I mean by that is there was this one huge room for all orthopedic services and several small rooms, a lot like the most of us, the majority of this facility was for these pain procedures and that’s somewhat common, meaning that you could have that if your pain clinic, and you want to have these procedure rooms. The issue was when Dr. Spine really started getting into this deal, there was supposed to be more than one orthopedic service room because he needed, you know, if he wanted to do multiple patients, you have different rooms for that. And there was just one and there was really no discussion on all these small pain rooms that we’re developed.
Michael: And what happens so often in stories like this, Dr. Spine was busy with his clinic and he was not paying attention to the build-out, but Dr. [00:17:00] Pain on the other hand was working hard at telling Mr. Network how he could get a ton of pain doctors to invest in this ASC. So Mr. Network, pivoted this ASC from a spine focused ASC to a pain focused ASC.
Brad: Yeah and additionally, most of the time if a medical service that Dr. Pain was going to provide, unfortunately the insurance companies wouldn’t reimburse for it because at the time a lot of these things were too aggressive or are not approved yet by insurance providers, all these details quickly expose that Mr. Network didn’t have really an actual network of physicians or physician investors that he had talked about when he sold Dr. Spine on this idea. And truly it looks like didn’t really understand all the actual details, zoom in, of setting up an actually profitable ASC.
Michael: Okay. So let’s fast forward again, [00:18:00] as the audience can predict, this does not end well for Dr. Spine. The revenue for this ASC was not adding up. Dr. Spine’s surgical services at the ASC was barely keeping the lights on and the business was going backwards. Dr. Pain’s services were not reimbursed at the level they wanted, or sometimes even at all. Mr. Network had not found another doctor to provide services or invest and things looked dim.
Brad: Yeah. So here is Dr. Spine working his tail off, keeping the place open. He’s a minority owner, and this finally starts leading to him being a little frustrated. And so Mr. Network and Dr. Pain, they go out and try to find some creative ways of turning up business because Dr. Spine is kind of aggravated with them, which we’ll just say, ethically questionable ideas, or outright could actually harm the overall [00:19:00] ASCs license issued by the state.
Michael: Yeah. Usually when you’re doing questionable things in healthcare, it’s not a good thing. So Dr. Spine wanted out, even though there was a ton of debt on the ASC, the facility was not going to make it. So let’s go into a commercial and on the other side talk about the details he should have considered when developing a proper, properly licensed ASC and what type of investigation Dr. Spine should have conducted with Mr. Network before he entered into this deal.
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Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host Brad Adatto with my cohost Michael Byrd.
Michael: Brad, we just discussed a troubling story of all the issues that went wrong for Dr. Spine. For our audience, let’s give them a small taste of the rules, which government, and Brad I said small, a small taste of the rules which govern the ASC world when physicians are investors. And remember, please use plain language.
Brad: I will do my best here, Michael, to use plain language. And then for our audience to understand there are basically two main federal laws that you’ll hear people discuss in this industry and they’re more than that, but those are the ones that people look to. One is called stark, which is basically the federal anti-referral law. And the other one is called the Anti-kickback law, which is the one that it is what [00:21:00] it is, but the anti-kickback law is actually more relevant to today’s story. So we’re just going to focus on that and not worry about stark today. So that will help with keeping it as simple as possible. But for those who want to understand what is the anti-kickback law, really it prohibits directly or indirectly offering or receiving a value in exchange for anything to really induce anyone to refer to a facility where you have a financial arrangement. And I’m paraphrasing the thing goes on forever. The law applies to everyone, so not just physicians. And the federal government has used this law and over, over the life of it, because it’s so broad they love to use this as a way to prosecute people, both criminally and civilly.
Michael: And I am truly dumbing it down, but it’s essentially this, you can’t pay for referrals.
Brad: That’s it.
Michael: So how do you protect yourself?
Brad: So when these laws came out, a lot of people were freaking out about how do I protect myself? What do I need to do? So the government said, okay, what we’re going to do is we’re going to create these [00:22:00] safe harbors. And if this arrangement falls directly within a safe harbor, then you’re immune from prosecution and administrative fines. So great. That’s good. And this is different than stark law again, a little legalese here that stark law has stark exceptions. If you fail to meet one stark exception, it is illegal, but if you failed to meet one element of a safe harbor it doesn’t make it per se illegal, but to be clear, the safe harbor is there so that you can structure your way to be most compliant.
Michael: And so Brad, again, keeping it dumbed down because these doctors are billing for operating and their patients that they’re treating and then they’re referring it to a facility that will also bill for it. We have to deal with this because that’s a referral. And so what safe harbors do, they need to meet based on kind of today facts.
Brad: Yeah. And just for the audience again, there’s so many different safe harbors. So depending on what structure you [00:23:00] are in and the government has come up with these safe harbors for ambulatory surgery centers so there’s some basic elements of everyone, I’m going to keep it really high level. Number one is ownership must not be related to the volume or value of those referrals. Number two, you the organization and the other investors can’t loan someone money to invest in that ASC, the distributions need to be made based on their pro rata share of ownership. All ancillary services that are performed there must be related or part of the primary practice of that surgeon. And finally, the physician must disclose their ownership with those patients. So that’s a really brief one. If you’re a healthcare lawyer, you’re probably laughing because I left some things out, but trying to keep it as simple as possible because otherwise Michael, we get legalese and then the people stop listening
Michael: Good grief, man. I mean, it’s still heavy. I’m like about to fall over, is that all?
Brad: No, of course not. I mean, this is the memory when we talk about the exceptions to the exceptions, to the exceptions. Well, as these different [00:24:00] ASCs come together there, they’re saying look, if you’re making this an extension of your office, you the physician, we want to make sure it truly is an extension of your office. And so they came up with Michael, the one-third tests. And so as a one third test, you have to meet it to be compliant. And so, because as we talked about earlier in this episode, this is a multi-specialty cause we have a spine surgeon at working with the rehab doctor. So because of that, they have two things that you have to meet in this one-third test. So stay with me Michael, stay with me. Part of this one-third test is that, that investor who’s performing those services there, that at least one third of their income from all sources and the medical side and the last 12 months must be derived from services that a physician would perform at an ASC. So it doesn’t matter what ASC so long as it’s for those types of surgical or invasive procedures performed that ASC. The second element is basically the exact same concept, but one third of all those procedures [00:25:00] performed by that physician for that same 12 month period must be performed at that ASC. So it is an income test and a facility test. And it’s all about that one-third test.
Michael: Brad please, on behalf of the audience and anyone who could possibly bump into this let’s pause. No more regulatory talk. And I want to know, why did you make me and the audience go through this painful, safe harbor?
Brad: So it’s vital to understand these rules when you go into doing an ASC because it impacts your company agreement, impacts your medical staff bylaws, and if you don’t understand that you can fail to be compliant with your ASC and put yourself in an illegal arrangement and as such, you know, the ASC must be very active and proactive, meaning that it does know about this. And then must keep up with making sure that they’re meeting these rules.
Michael: What I do whenever a client calls us and they start talking about ASCs and [00:26:00] setting it up and this type of arrangement, I make them talk to Brad and Brad will fix it because it’s hard to keep track no matter how simple, believe me. I know the other side of this and Brad has simplified this stuff so much, but Brad, how does it apply to today’s story.
Brad: All right, fair. So doctor spine was meeting these requirements of this one-third test that we talked about. So that was great because it was providing all of those services.
Michael: What about Dr. Pain?
Brad: Ah, Dr. Pain was not on the same path as Dr. Spine because he was still doing in-office procedures in which there they were paying him for and meaning he could collect, but remember we talked about with this ASC revenue, he was struggling to collect it at all, or he was performing services there and they weren’t paying for it at the ASC.
Michael: But that was not the only problem now.
Brad: So besides the potential running a foul with the safe Harbor, again clarity here just [00:27:00] because they don’t meet it perfectly, doesn’t make it illegal. Dr. Pain and Mr. Network were also potentially jeopardizing the state license of the ASC.
Michael: Well, that doesn’t sound good.
Brad: It’s not. When a state licenses issue is generally issued to that individual or in this case to the entity. So only that entity qualifies to use that license for a license to be used by another person or an entity. It must be formerly transferred with the applicable state agency.
Michael: Yeah, and this is often called a CHOW or a change in ownership. And so when filing a CHOW there can be a ton of paperwork and sometimes a pre-approval required by the state.
Brad: Yeah. And it does depend on the type of facility, but let’s just jump back into having that state license. An ASC is a valuable asset because you worked really hard to get it. You get it qualified, and it’s now a license. It’s something that can be sold as such. You don’t want to lose it because people do pay top dollar for an ASC [00:28:00] license and that’s because you have to meet all these restrictions to keep that license. Like that same license can’t be used by any other entity if they wanted to because it’s only owned by one.
Michael: Okay. So why do you bring this up?
Brad: So remember those unethical or questionable arrangements we talked about earlier, Mr. Network and Dr. Spine were going to these other entities and saying, hey, why don’t you bill and collect under our ASC license as if it’s your own license and then you can just go off and collect it. And this opens up to a huge block of issues. This includes potential insurance fraud allegations from commercial payers, potential breach of the actual license with the state, and of course potential versions of bringing up that little anti-kickback thing that we talked about earlier.
Michael: In plain English I call that not good. So once Dr. Spine learned all of that, he was ready to get out of the ASC as you might imagine. He [00:29:00] demanded that Dr. Pain and Mr. Network were to purchase his ownership, but based on the debt load of the ASC, the fact it was built for pain procedures, and the commercial payers were not paying for these services, neither Dr. Pain nor Mr. Network wanted to buy out Dr. Spine. So this led to the entire ASC being sold in a fire sale with Dr. Spine having to pay a large portion of the note off himself based on his personal guarantee.
Brad: Yeah. So Michael, this season is zoom in and so we are going to talk about the details here. Hopefully the audience was able to spot them with us, but because Dr. Spine was not interested in the details, it allowed other people to really go through that for him. He unfortunately partnered with a third-party that didn’t really know ASCs as well as he should have. He was a really good salesman saying that he had a great network, but unfortunately he actually did not have a great network. And so he had a vision of [00:30:00] what he wanted to do for spine doctors and ASCs, and that could not have been more different as to what was falling delivered, because he wasn’t constantly on the details. Michael, final thoughts?
Michael: You know, we’ve talked about plain language and trying to make things more simple. And even when you try to do it on some of this healthcare regulatory stuff is still doesn’t make sense. It’s still complicated. And I would just strongly encourage anyone if you don’t understand it, that doesn’t mean ignore it and go forward. Just ask for help because there’s a lot of areas in healthcare that frankly don’t make sense and you need a translator
Brad: Yeah. Audience, please join us next Wednesday. We will actually have a special guest joining us, Jay Reyero, which you may have heard his voice before, but we wanted to talk about this particular episode about the multi-specialty and next week we’re talking about [00:31:00] doing one without a license. How can you do an ASC or an in-office surgical center? So tune in and learn more. Thank you for joining us.
Outro: Thanks again for joining us today. And remember, if you liked this episode, please subscribe. Make sure to give us a five star rating and share with your friends. You can also so sign up for the Berta a newsletter by going to our website and had heard of datto.com. Berta Datto is providing this podcast as a public service. This podcast is for educational purposes. Only this podcast does not constitute. Vice nor does it establish an attorney, client relationship reference to any specific product or entity does not constitute an endorsement or recommendation by Berta Datto? The views expressed by guests are their own and their appearance on the program does not imply an endorsement of them or any entity they represent. Please consult with an attorney on your legal issues. [00:32:00]